Exchange Protocols

Some early thoughts on the blockchain by way of a series of recent articles by Ben Thompson and others.

The Bitcoin blockchain is a protocol that has the potential to transform the architecture of the internet. Bitcoin is a digital, distributed crypto-currency. The transfer of bitcoin takes place directly between transacting peers (no central bank or clearinghouse). The security of each transaction is verified by a cryptographic problem, solved by the distributed processing power of the bitcoin network, and checked against a public key—the blockchain ledger. Participation in this cryptographic work is ensured by the fact this is the basis upon which bitcoins are generated, or awarded.

Speculation has run rampant about how this architecture might be used to facilitate services other than cryptocurrencies that similarly depend upon both security and openness. Ben Thompson, on his site Stratechery, discusses 21 Inc.—a technology startup—and the launch of their BitShare chip. According to 21 Inc., the chip "can be embedded into an internet-connected device as a standalone chip or integrated into an existing chipset as a block of IP to generate a continuous stream of digital currency for use in a wide variety of applications." Ben's assessment (“21Inc. and the Future of Bitcoin”) includes the following points against the product’s economic case for consumers:

  • A single BitShare chip, given its minuscule processing capabilities, would need around 93 years to “win” a Bitcoin award
  • Thus, 21 Inc. will operate all of the BitShare chips it sells as a pool: Bitcoin income will be shared across all BitShare-installed devices, but only some — 21 Inc. will keep 75% of the revenue
  • Meanwhile, remember what Bitcoin is — digital electricity. And the consumers who own all of those BitShare-enabled devices will be paying 100% of the cost of that electricity

Indeed, it makes far, far more sense for consumers to simply buy Bitcoin that has been harvested by the sort of industrial mining operations I talked about above on the open market.

But there is no need for the transactions that take place between such devices to have a financial relevance from the consumer standpoint. Instead, the value of these transactions, from a consumer perspective, is secure communication that they ensure. Devices with this embedded chip could conduct transactions among themselves in order to verify trusted connections for any variety of network-enabled task promises by the ever-imminent Internet of Things. In this arrangement, companies like 21 Inc. own common pools of Bitcoin—transactions themselves are zero-sum, but they provide work from which to earn more Bitcoin.

The Bitcoin mining capability of each individual chip it too small to matter on an individual basis, so 21 Inc. is positioning themselves to profit from a mining operation that is distributed across all these devices. The value of Bitcoin is then underpinned not only by the processing power/electricity that goes into running the mining devices, as Ben explains, but the utility of the protocol in serving as the standard of communication and security.

Ben acknowledges that "Bitcoin inherently has nothing to do with money," and his fixation on the cost of electricity for running the BitShare illustrates the critical role that such a protocol can play in coordinating data and physical systems. However, his analysis remains fundamentally economic, and he doesn't go far enough in considering the implications beyond currency. He states that Bitcoin is "a protocol that enables rivalrous (non-copyable) digital goods," —language that is intended to evoke market economics, thus grounding his perspective in the idea of a financial protocol rather than one of more flexible and fundamental communication.

Fred Wilson describes another potential expression of this value in his explanation of a OneName, a startup that received investment from his firm, Union Square Ventures:

I predicted that there would emerge a “bitcoin like protocol” for identity. And we’ve been looking for that.

One thing we realized along the way is that this could be built on top of bitcoin or another blockchain. And so earlier this year we made a seed investment in a startup called OneName that is building exactly that…

Now many will say “well Facebook, Google, and Twitter handle that pretty well for me” and they would be right. But are you really comfortable with Facebook or Google operating the identity layer of the Internet? I am not. And I think over time less and less of us will be.

But the answer isn’t another startup controlling the identity layer of the Internet either. The answer is a distributed ledger of identity that is open and not controlled by any entity. And that sounds like an application for a blockchain if there ever was one.

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